Budget Analysis for Expenditure Rationalization

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Budget Analysis for Expenditure Rationalization

• Public Finance Analysis and Management Course
• World Bank, May 1-5, 2006
• Marijn Verhoeven
• Expenditure Policy Division
• Fiscal Affairs Department, IMF

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Overview

• Why expenditure rationalization?
• The analytical tool box for expenditure
  rationalization
• A word about data
• Measuring efficiency
• We found the problemsnow what? (very briefly!)

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Why expenditure rationalization?

• To achieve macroeconomic stability and fiscal
  sustainability
• To create fiscal space
• To increase allocative efficiency by cutting back
  or reforming government activities
• To enhance X-efficiency by achieving the same
  outputs with less inputs

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Why expenditure rationalization? (contd)

Macroeconomic stability and fiscal sustainability
Fiscal space
Allocative efficiency
X efficiency
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Why expenditure rationalization? (contd)
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The analytical toolbox for expenditure
rationalization

• Tends to be based on descriptive statistics
• Cross-country comparisons and rules-of-thumb are
  important
• Analysis often incorporates institutional
  elements
• Comparatively little use of advanced quantitative
  techniques

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A word about data

• Expenditure analysis is typically data driven
• But data are problematic
• There are many competing sources of spending
  data, each with their strengths and weaknesses
• Let us look at the example of data on wage
  spending

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Facts and figuresmeasuring wage spending

• The wage bill is measured
• As a share of GDP and total spending to compare
  across countries
• As a share of domestic revenue to assess
  sustainability
• At the sectoral level, compare to nonwage
  spending to assess efficiency
• Source is IMF Government Finance Statistics or
  national data

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Lies and statistics mismeasuring wage spending?

• Not all compensation may be captured in wages and
  salaries transfers (pension benefits and
  subventions for education), other goods and
  services (in-kind benefits and contractual
  workers), and capital spending (donor-financed
  projects) may hide substantial wage spending. In
  Nicaragua, out of actual wage spending of 8.6
  percent in 2005, less than 4 percent is recorded
  as wages and salaries.
• When government is decentralized, central
  government wage spending is biased downward. But
  reliable data for general government are rare for
  low-income countries.

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Facts and figuresmeasuring employment

• Employment is measured by
• Share of government (or public sector) employment
  relative to total population, and total/private
  employment to compare across countries.
• The distribution of employment over sectors.
• At the sectoral level, the mix of workers with
  various skills.
• Source is World Bank civil service database.
• But coverage and accuracy of data is a big
  problem.

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Table 2. Government Employment in the 1990s 1/
Number of countries General government employment as percent of population Number of countries General government employment as percent of total employment
Asia 11 2.6 3 17.2
Eastern Europe and Central Asia 17 6.9 15 42.3
Latin America and the Caribbean 9 3.0 10 20.4
Middle East and North Africa 8 3.9 4 50.3
Sub-Saharan Africa 20 2.0 8 28.4
OECD 2/ 21 7.7 15 21.0
Sources Schiavo-Campo, Salvatore, Giulio de
Tommaso and Amitabha Mukherjee (1997), An
International Statistical Survey of Government
Employment and Wages, Policy Research Paper 1806
(Washington The World Bank) Hammouya, Messaoud
(1999), Statistics on Public Sector Employment,
Methodology, Structure and Trends (Geneva
International Labor Office) and OECD
(2001), Highlights of Public Sector Pay and
Employment Trends (Paris OECD). 1/ Latest
data for 1990s, except for the share of general
government employment in population, which is for
the early 1990s.
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Facts and figuresmeasuring compensation

• Measures for compensation include
• Wage comparisons with the private sector (average
  or adjusted for skill level) to assess whether
  government workers are overpaid. A rule of thumb
  for the discount in public sector wages is 10-30
  percent (but treat with caution!).
• Compare government wages with GDP per capita
  provides information on adequacy of government
  pay in view of living standards (again, be
  cautious!). If a household survey is available, a
  more detailed assessment can be made.
• The compression ratio compares the highest with
  the lowest government salary scale. This is used
  to assess adequacy of wages for the highly
  skilled. A rule of thumb is that the ratio should
  be no lower than 12 (yet again, be cautious!).
• Data source is often national.

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Efficiency the issue
Source World Bank (2004) World Development
Report 2004. Spending refers to total annual
public spending per child of primary school age,
in 1995 US dollars.
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How should we think about the efficiency of
public spending?

• The measurement of efficiency generally requires
  the following
• (i) information on inputs and associated costs
• (ii) an estimation of output or benefit and
• (iii) a comparison of (i) and (ii)
• Key question
• Could the same level of output be achieved with
  less input?
• Equivalently, could more output be generated with
  the same level of input?

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How should we think about the efficiency of
public spending? (contd)

• What is the mix of public programs that best
  meets government objectives?
• Where to invest the marginal dollar across
  sectors
• For example, can education goals be reached by
  investing the marginal dollar in other sectors?
• Where to invest the marginal dollar within
  sectors
• Primary versus secondary education
• Primary health care versus secondary health care

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How should we think about the efficiency of
public spending? (contd)

• Given allocative decisions, is output maximized
  with given inputs?
• Common problems
• Inappropriate student/teacher ratios
• Shortage of medicine or nurses relative to
  doctors
• Shortage of textbooks
• Waste, leakage of funds
• Labor and utility costs crowding out maintenance
  and capital spending

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Measuring efficiency

• Review the basics of public spending
• Functional classification
• Primary, secondary, tertiary of education
• Primary, secondary, tertiary and higher care (or
  preventive versus curative care)
• Inputs, programs, types of intervention
• Education Teachers, textbooks
• Health Aeral spraying, information and education
  campaign, etc.
• Economic classification
• Wage versus non-wage
• Recurrent versus capital (investment) spending
• Central and local government budgets, other
  Ministries
• Planned versus actual, nominal versus real
• Share of private, NGO, and donor spending

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Measuring efficiency (contd)

• Benchmarking simple diagnostics
• Some useful descriptive statistics
• Budget data
• Unit costs
• Ratios of teachers, students, non-teaching staff
• Distribution of teachers among levels of
  qualifications percentage meeting basic
  government standards
• Actual maintenance budget versus engineering
  estimates for routine maintenance
• Enrollment rates, repetition rates, dropout rates
• Absenteeism, informal payments, etc.

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Measuring efficiency (contd)

• Benchmarking simple diagnostics
• Comparisons
• Sub-national units, clinics, schools
• Private versus public schools
• Private versus public health facilities
• Comparator countries
• Cross-country information on output
• UNESCO education indicators
• Program for International Student Assessment
  (PISA)
• WHO Indicators of Health System Attainment
• Trends in International Mathematics and Science
  Study (TIMSS)
• Progress in International Reading Literacy Study
  (PIRLS). The International Survey of Adults (ISA)

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Measuring efficiency (contd)

• Benchmarking Efficiency Frontier Analysis
• Basic idea measuring distance from the
  efficiency frontier
• Regression analysis
• Corrected ordinary least squares (COLS)
• Evans et al (2000), WHO (2000) Efficiency of
  national health systems
• Alternative Greene (2005) Stochastic frontier
  analysis
• Free disposal hull analysis (FDH)
• Gupta and Verhoeven (2004) (Chapter 11)
  Efficiency of health and education spending in 85
  countries, 1984-95
• Data envelopment analysis (DEA)
• Herrera and Pang (2005) Efficiency of health and
  education spending in 140 countries, 1996-2002

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Efficiency Frontier Analysis A Brief Overview
Output
D
C
Residual
E
A
B
Input
A Regression Approach
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Efficiency Frontier Analysis A Brief Overview
Output
D
C
E
A
B
Input
Corrected Ordinary Least Squares (COLS)
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Efficiency Frontier Analysis A Brief Overview
Output
D
C
E
A
B
Input
FDH Approach
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Efficiency Frontier Analysis A Brief Overview
Output
D
C
E
A
B
Input
DEA Approach
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Measuring efficiency (contd)

• Randomized evaluations of educational reform
  programs, based on
• Random selection of schools for the reform
• Colombian voucher, Angrist and others (2002)
• Randomized phase-in of programs
• Argentina Decentralization took place across all
  provinces, but at different periods and
  intensities, Galliani and Schargrodsky (2002)
• Public Expenditure Tracking Survey
• Traces the flow of resources through the
  bureaucracy from the central government down to
  the service facility
• Comparing originally allocated funds with funds
  that actually arrive at the facility
• Amount of time required for fund to arrive
• Reinikka and Svensson (2001) Uganda in the
  1990s, significant leakage existed

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Example of efficiency analysis using DEA

• On-going research on the efficiency of spending
  in EU New Member States
• In the context of an Article IV mission to
  Slovenia, we made a presentation to the
  authorities on preliminary results, focusing on
  Slovenia
• We presented findings for education, health, and
  social protectionI am focusing here only on
  social protection

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Social spending does not efficiently reduce the
risk of poverty
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Social benefits could be better targeted

• Social benefits are either poorly targeted or too
  small in magnitude to significantly lower income
  inequality.

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What are we missing?

• Regarding the mix of public programs
• Complexity of policy objectives
• Incomplete models/data
• Measuring outputs and outcomes
• Trade-off between quality and quantity
• Feedbacks and externalities
• Proper measurement of complementarities
• Lagged effects
• Externalities Lower risk of epidemics due to
  vaccination healthy, informed electorate
• Private versus public provision

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Policy reforms for increasing the efficiency of
public spending

• Expenditure Reform
• Input mix, personnel policy (e.g., hiring freeze,
  reduction in support staff, etc.)
• Broad reallocation of expenditure (primary versus
  secondary education or health)
• Management Reform
• Decentralization
• Community-managed schools, district health
  management
• Financing Reform
• Voucher system
• User fees